Should Inheritance Be Taxed as Income?

Abstract

Many have advocated the taxation of bequests and gifts as income in order to achieve substantial revenues from unearned wealth and address inequality. There are, though, many drawbacks to the idea of taxing inheritance as part of the beneficiary’s income. Even for those who claim the inclusion of inherited wealth in the beneficiary’s income tax base, the features of the current taxes on gratuitous transfers should be retained. High tax exemption thresholds, annual exemptions for small gifts, medical expenses and transfers to spouses, tax deferral for illiquid assets and so forth would continue to apply to inherited wealth, notwithstanding their inclusion in the income tax base. In the author’s opinion, the foregoing is a serious argument against including inheritances in the concept of taxable income. The special treatment to be accorded to inherited wealth, as compared to other taxable income, undermines the belief that legacies should be imposed as income, since it signals that they are inherently different. Inheritance is certainly suitable grounds for taxation, but it seems more appropriate to continue taxing it as part of an autonomous levy, without yielding to suggestions that it be included in the income tax base.